Category Archives: Grantmaking

Project Streamline Chairman Responds

June 3, 2008 – 8:54 am
Richard Toth, of the Robert Wood Johnson Foundation and chairman of Project Streamline, comments on my recent posts:
Sean, thanks for reporting on this project. I am the Chair of the Project Streamline and I am particularly interested in what you and your readers have to say about our conclusions. I think your comparison to the investment industry is very relevant. Do foundations really need data in different formats or is it just ³the way it has always been done?² Is it possible that foundations like investors could all be given the exact same information but the decision making process will be determined by how foundations look at the data? Can you imagine if publically traded companies were required to rewrite their financials for each of their major funders? Or draft a different prospectus for each hedge fund? It seems absurd. Yet, essentially that is what non-profits are facing. The question Project Streamline is trying to address is how can we improve this process?

By Sean Stannard-Stockton | Also posted in Effective Giving, Foundations, Philanthropy | Comments (0)

Givers: Go Out and See For Yourselves

June 3, 2008 – 7:34 am
This is my most recent column from the Financial Times. You can find the full archive of past columns here.

Givers: go out and see for yourselves

By Sean Stannard-Stockton

Published: May 31, 2008 (link to original Financial Times article)

I recently left behind my office, with its constantly ringing phone and glowing computer screens, to visit some of the non-profits funded by Philanthropic Ventures Foundation, a public charity founded and led by Bill Somerville.

As we stood in line at a soup kitchen in our dress slacks and collared shirts, the other men and women turned curious eyes our way. “I’ve brought people here in the past who worry that these people won’t want to be stared at,” Somerville said, “but as you can see, it is you and I who are the ones sticking out.”

A nationally recognised expert in creative grantmaking and author of the new book, Grassroots Philanthropy: Field Notes of a Maverick Grantmaker, Somerville has spent the past 17 years as the head of PVF. There he has replaced the bureaucratic shackles that hamper much foundation work with creativity.

Earlier that day, we went on a “field trip” to North Fair Oaks, an unincorporated area of San Mateo County mid-way between San Francisco and Silicon Valley where many newly arrived immigrants make their home. As we travelled from a new, privately funded school for immigrant children and their mothers, to a Catholic Workers house where a young family battling drug addiction had recently found refuge, we passed a seedy motel.

“I stayed there one night before an early morning trip to collect food for the soup kitchen,” Somerville told me. “By the time I woke in the morning the police were pounding on the door trying to figure out why I was staying there!”

In Somerville, I found a risk-taking, venture philanthropist fused with a roll-up-his-sleeves social worker. The mixture is a philanthropic force of nature.

In Grassroots Philanthropy, Somerville describes in engaging prose how to be an effective philanthropist. With no agenda other than his need to set things right in the world, he lays out a series of principles that can be adopted by both endowed national foundations and those with lesser means, providing they have an urge to use their wealth to improve the world.

Recently, a lot of effort in the philanthropic world has gone towards analyzing non-profits via an examination of their financial results. By separating how much an organization spends on “overhead” versus “programs”, some people hope to identify the non-profits that most deserve funding.

But Somerville never discusses this concept in his book. Instead, he urges readers to “locate outstanding people doing important work”. To accomplish this, he suggests visiting non-profits to evaluate the people working there. Every community has people who accomplish amazing social missions on limited funding. Just as mutual fund manager Peter Lynch once told individual investors they had an edge over Wall Street in knowing what products were the hot new thing, it seems to me that individual donors have an edge over foundations in knowing who the outstanding people are in their community. To remedy this, Somerville suggests that foundation program officers should spend at least 30 per cent of their time away from their offices getting to know the people they are interested in funding.

Individual donors who are used to writing checks in response to a fundraiser’s appeal may not realise that many foundations take six to nine months to respond to a grant request. In the chapter asking donors to approach grantmaking with “speed and grace”, Somerville admits an “intense aversion to pointless paperwork” and tells the story of PVF’s “fax grant” program.

When a donor gave the foundation $100,000 and asked it to tackle California’s education problems, Somerville knew that the amount of the grant could not address the large structural issues behind the state’s education woes. But he could help teachers pay for much-needed supplies and field trips. Thus was born the foundation’s “immediate response” grantmaking program whereby teachers could fax in requests for funding to buy such things as science equipment, make-up for the theater department, or funds to take students to the zoo.

By responding to requests in a shockingly short 24-hour timeframe, the foundation was able to deliver money directly into the hands of the people responsible for educating our children. To date, PVF has given out $3.5m in immediate response grants.

“Take risks. Move quickly. Get out of the office and into the field.” The philanthropy practiced by Somerville is energizing, creative and clearly effective to anyone who spends a day visiting the people he funds. In a philanthropic world being revolutionized by new approaches to giving, Somerville is both a throwback to simpler times and a leap forward towards high-impact, efficient giving that embraces imagination and risk-taking.

The writer is a principal and director of tactical philanthropy at Ensemble Capital Management and author of the blog TacticalPhilanthropy.com

By Sean Stannard-Stockton | Also posted in Effective Giving, Financial Times Column, Foundations, Impact Measurement, Philanthropy | Comments (3)

Enormous Variability in Foundation Grantmaking Process

June 2, 2008 – 11:32 am
The Project Streamline report (see my introduction) points to 10 “flaws” in the system of foundation grantmaking:

In short, a system has emerged—a system that is widely accepted and rarely challenged. Yet
the cumulative effect of countless carefully wrought Requests for Proposals, grantmaker-specific
practices, mission-centered questions, and unique requirements creates a staggering burden on
nonprofit grantseekers…

Our study found ten ways that the current system of grant application and reporting creates
significant burdens on the time, energy, and ultimate effectiveness of nonprofit practitioners.

Flaw #1: Enormous Variability

Nonprofits encounter a dizzying range of practice—both within and among funders—when it comes to the types of information they are required to provide.

For example, according to Center for Effective Philanthropy (CEP) data, some foundations require
financial information from over 90 percent of their prospective grantees, while others require it of only a small fraction or none at all. Even within foundations there is variability. The majority of foundations CEP studied require nonprofits to submit a Letter of Inquiry (LOI) between 34 percent and 55 percent of the time—meaning that even within one foundation, a grantseeker may or may not be asked to submit an LOI.

The report describes various types of foundations (”The Mystery Foundation”, “The Fickle Authority”, etc) who have different reasons for asking for some much info. You can find the full report here.

There has long been talk of a “common grant application”, whereby foundations would adopt a single, common form for grant applications. Many universities have done this to some extent for college applications. But I’m not so sure this is a good idea. As someone who researches investments in publicly traded stocks, I know that there are lots of smart investors that have VERY different criteria than my firm does. There is not a simple, standard approach to grantmaking (or stock market investing) that can be distilled down into a single form. But I do think that it makes great sense for foundations to very clearly lay out their grantmaking guidelines. Then they should reject early and often, explaining clearly why the potential grantee did not make the cut (A paragraph or two of honest feedback is most likely all that is needed). Then request the detailed, customized information that the foundation needs for the small pool of applicants that made the cut.

If you are the kind of foundation that funds 1 out of 3 or 5 or so applicants, than by all means you can have a completely customized process for each one. But if you are trying to screen through 10’s or 100’s of applications for each grantee you fund, let’s create some screens and don’t waste your time or the time of all those nonprofits who don’t have a chance.

As one nonprofit employee says in the report, “Just as foundations don’t want to receive proposals
that don’t fit their mission, nonprofits don’t want to spend time preparing proposals that aren’t going
to go anywhere.”

By Sean Stannard-Stockton | Also posted in Cross-Disciplinary Conversations, Effective Giving, Foundations, Philanthropy, Transparency | Comments (6)

Project Streamline

May 30, 2008 – 8:09 am

The Project Streamline report begins:

A national organization has dozens of foundation funders, each with a distinct application process, different requirements, and its own cycle for funding.

As part of their annual report to a funder, staff from a nonprofit service agency have to categorize their clients according to the funder’s specifications, even though the categories are not the same ones that the nonprofit uses.

Three times each year, a family foundation with broad funding guidelines receives 70-80 proposals in the mail. This overwhelms the single staff person, as well as the board members who serve as program officers.

Most grantmakers take their responsibilities to support nonprofit and other public-serving organizations seriously, and spend considerable time thinking about how they can be most effective. Stories of highly productive, warm, and mutually satisfying partnerships between organizations and their funders abound. Yet the grantmaking process is rife with inefficiencies such as those suggested in the above stories, and these inefficiencies mean that everyone is wasting time and money that could be devoted to accomplishing missions.

The Project Streamline report goes on to outline how incredibly inefficient the grantmaking process of foundations are and says:

Determined to address the great waste of time and energy caused by inconsistent and inefficient reporting and application procedures, eight organizations representing grantmakers and grantseekers came together to form Project Streamline. Project partners include the following organizations:

  • Grants Managers Network
  • Association of Fundraising Professionals
  • Association of Small Foundations
  • Council on Foundations
  • Forum of Regional Associations of Grantmakers
  • Foundation Center
  • Grantmakers for Effective Organizations
  • National Council of Nonprofit Associations

Together, these diverse partners commissioned a scan of grant application and reporting practices, their impact on grantseekers and grantmakers, and the implications for the field. This report is the result. Its goal is to spark thinking and dialogue on this topic across a wide range of grantmaking stakeholders of all shapes and sizes. (Emphasis from the original).

The report cites “Ten Flaws in the System” and three “Creative Approaches” to fixing the system. Given the readership of this blog includes a pretty even split of funders and grantees, I thought I’d run with the reports hope to “spark thinking and dialogue on this topic” and start discussing the report here. I’ll start Monday with “Flaw #1″. Some initial comments on the report can be found on the Project Streamline website (is comment #1 ironic? I sure hope so!)

One quote from the report caught my eye. It is one of those things that is both shocking as well as unsurprising to anyone who knows philanthropy.

“The administrative burden placed by funders on community nonprofit organizations is so heavy and so unrelenting, and places so many constraints on their ability to operate that it is a wonder they can deliver any services effectively.”

—Lynn Eakin, from We Can’t Afford to Do Business This Way

By Sean Stannard-Stockton | Also posted in Cross-Disciplinary Conversations, Effective Giving, Evaluation, Foundations, Impact Measurement, Philanthropy, nonprofits | Comments (2)

Foundation Research for All!

May 20, 2008 – 7:33 am
Yesterday I wrote about foundation consultant Tom David’s practice of posting reports he has been commissioned to create by large foundations on the web for anyone to read. Turns out Blueprint Research and Design, the consulting firm run by Lucy Bernholz (who blogs at Philanthropy 2173) posts all of their reports online as well. They also do something else; their standard contracts include intellectual property rights language that REQUIRES foundations to agree to the release of a public version of the report.

The business people out their are already questioning how a business plan works that instantly makes valuable information available for free (why don’t the foundations all sit around waiting for someone else to pay to have a report created and then use the free version?), but that’s because of a fundamental difference in for-profit and philanthropic marketplaces. In the for-profit arena, “controlling” valuable information is the key to high profit margins. In philanthropic market places, “spreading” valuable information is key to creating impact. This is because the “returns” that philanthropists generate from applying knowledge accrues to everyone. When you pay to have a report created and others use your work to generate social good, that social good is a result of your work and so you have created more impact.

In Lucy’s words this practice of information release “directly leverages the initiating foundation’s investment with other funders money.”

PS: I think what Tom and Lucy (and I’m sure other consultants as well) are doing is great. But I want to clarify that my longer term argument for foundation transparency is focused on the idea that foundations can enhance their impact by making their accumulated knowledge available to the public. This does not mean they have to spend a lot of money to package the information for general consumption. Just as GuideStar and Charity Navigator packaged up 990 info for the public, I’m sure that third parties would emerge to package up foundation information and market it to the public.

By Sean Stannard-Stockton | Also posted in Effective Giving, Foundations, Impact Measurement, Information Sharing, Transparency | Comments (5)

The Commodity Nonprofit

May 13, 2008 – 9:46 am

Yesterday I asked whether nonprofits delivered a commodity of a premium product/service. I want to reiterate that I did not use “commodity” to mean “inferior to a premium product.” I meant commodity to refer to homogeneous products that consumers general choose between based solely on price. Examples: milk, gasoline, printer paper, computer storage devices, generic pharmaceuticals. For-profit organizations can make a TON of money selling commodities (see oil & gas companies during the past few years), so I am not suggesting that selling premium products is somehow superior to selling a commodity.

Let’s think about the nonprofit space. If Organization A can deliver vaccines in Africa for $5 per shot and Organization B can deliver it for $10 a shot, a rational donor would likely fund Organization A. The assumption behind that decision rests on the idea that the product being delivered (a vaccination) is identical and so the most important thing to consider is cost. But what if we look at pre-school education? I don’t care how many teacher-hours are delivered per dollar. I care about the quality of the teaching (because the teaching is not an end to itself, it is the education of the child that we care about). In this environment, we have a premium product market where a rational donor will judge cost in relation to value. However cost still matters. A Lexus might be worth twice as much as a Ford, but even though it is a better car it would not be rational to pay 100 times the cost of a Ford.

When I think back on the discussions we’ve had about overhead expense ratios and the fallacy of quantitatively evaluating nonprofits, I realize that the commodity/premium product dichotomy can help us understand when to look at cost and when cost can be misleading.

There are a lot of nonprofits that deliver commodity-like products and that’s OK. Those organizations should be judged based on cost of delivery. But many, many nonprofits deliver a premium product that is better (or worse) than similar products offered by competing nonprofits (and for-profits). These organizations should be judged on the quality of their product and the cost of delivery in relation to the level of quality.

By Sean Stannard-Stockton | Also posted in Effective Giving, Impact Measurement, Philanthropy | Comments (2)

Conversations with a New Donor

April 17, 2008 – 8:46 am

I had a fascinating conversation over lunch at the Global Philanthropy Forum with a young philanthropist. He was in his 20’s and along with his uncle had started a pretty large family foundation. He described the difficulty they had just trying to figure out how to get things started and how now after 18 months they were ready to really work on developing programs.

I mentioned in my last post on GBF how the intention of this conference is to bring together family foundations who can learn from each other and influence each others grant making. What I found interesting was this young philanthropist’s comment that many of the sessions seemed to focus on big policy issues. While clearly important, these issues did not help my lunch partner figure out how to create his programs. This gap, the gap in information available to individual philanthropists, is the information gap I’m focused on. A small segment of this gap is what I’ve designed Ensemble Capital to fill (the gap that led to the young philanthropists 18 month journey of simply getting his foundation up and running). But program development, either official foundation programs, or just strategic family giving, is a another huge gap. I suggested the book Inspired Philanthropy to him and told him about a program consultant I could introduce him to. But that’s not enough.

I think that supply begets demand as well as responding to demand. It is interest from donors that has led to the creation of Charity Navigator, the increasing level of philanthropy coverage in the mass media, the new philanthropy TV shows and Ensemble Capital. But on the other hand, I’ve found that most people who come to my firm for assistance don’t know what they don’t know. As they become educated about the possibilities, their interest and engagement in philanthropy grows.

Who is going to tell people the great story that is philanthropy? Who is going to weave the true story of the Second Great Wave of Philanthropy. Who is going to educate donors about the possibilities of philanthropy?

When an intelligent, young philanthropists like the one I had lunch with today has a hard time finding information about how to achieve impact (even after catching a long plane flight to one of the premier philanthropy conferences) how is it possible to make the argument that donors have always been focused on impact? To believe that donors have always wanted something and yet the market simply has not delivered it to them, is to believe in a massive market failure. The supply of impact-oriented philanthropy information does not exist because the demand is very new. The demand is small because the supply does not exist. I believe deeply that we are seeing the very early signs of supply coming to this market. I think the latent demand is massive. As the demand materializes in response to the coming supply, a feedback loop will develop and a Second Great Wave of Philanthropy will begin to crest.

What will these individuals fund? How will they conduct themselves? I met Case Foundation CEO Ben Binswanger at the conference. Have you seen the Case Foundation Make It Your Own program? Ben is one person who is already positioning his foundation to figure out how to leverage this Second Great Wave. Are you ready?

By Sean Stannard-Stockton | Also posted in Foundations, New Philanthropy, Philanthropy | Comments (1)

Donors Want Impact?

April 9, 2008 – 9:43 am

In response to my recent Financial Times column about new approaches to funding growing nonprofits, the following letter to the editor appeared in the April 5 edition of the FT.

Sir, Sean Stannard-Stockton (“Non-profits look to invest in themselves”, March 29) errs when he concludes his interesting column by saying that “while yesterday’s donors were content to give to a non-profit based on emotional appeal, today’s donors want to know their money is really going to have an impact”.Since the late Renaissance and the Reformation era when the conceptual and applied shift towards “modern philanthropy” with its pursuit of rationalised solutions to systemic problems occurred, donors have sought to optimise the outcome of their investments. Today’s “venture philanthropists” promise greater results and more accountability by borrowing from the practices of venture capital, just as “scientific philanthropists” of the late 19th century did by adopting the principles of the reigning intellectual framework of science.

In order to grapple honestly with the strengths and weaknesses of beneficence, it is important to recognise that new and better practices are often old methods that have been revived - because the problem of an unequal distribution of resources endures - and that perpetual frustration with the limits of philanthropy is a prime reason for the continual reworking of ideas.

Amanda B. Moniz,
Department of History,
University of Michigan

Michael Edwards of the Ford Foundation responded to the same sentence in my column saying, “[you] assume that impact considerations are new, when in fact they have been around for fifty years or more - just not expressed in the ways you
think are satisfactory.”

I agree that the concept of impact (attempting to give in ways that can do the most good for your dollar) is not new within institutional philanthropy. Because a lot of my readers work at institutional foundations, consult for these foundations, or work at nonprofits that receive grants from these foundations, I often address issues of institutional philanthropy. But I’m not an expert in institutional philanthropy. My firm, Ensemble Capital, serves individual philanthropists. When I talk about The Second Great Wave of Philanthropy, I’m talking about major shifts going on with individual donors. When I write for the mass audience of the Financial Times, I’m writing for individual donors. But given how my writing on this blog veers into issues of institutional philanthropy on a regular basis, I can see how it is my fault if people perceive that I’m declaring “impact” as a new concept to foundations. It is not.

Individual donors have always been aware of the idea that their donations could do more or less good depending on which nonprofits they funded. While they might not often use the word “impact”, the concept makes sense if it is explained to them. But I reject the idea put forth by Moniz and Edwards that “donors” (and that was the word I used, not “foundations”) have embraced impact considerations for half a century.

If in fact donors understood impact, which at its core assumes that some donations do more than others, than you would assume that these donors would strive to achieve higher levels of impact. Yet there are almost no mass market books that discuss this issue, almost no articles in print or online, almost no organizations that help donors achieve impact.

Now before you send me emails pointing to Inspired Philanthropy or Don’t Just Give It Away, before you point out that I’m writing a mass market column on these very issues at the Financial Times, before you tell me about excellent consultants like The Philanthropic Initiative, Arabella Philanthropic Investment Advisors, or my own firm Ensemble Capital, let me just say that all of that adds up to just a bit more than zero.

Individual donors have access to almost nothing compared to individual investors. Every bookstore in the country has a whole section devoted to personal finance (books on which generally ignore charitable giving while lavishing pages of copy on other obscure financial issues). Every daily newspaper devotes space to advising individual investors and we have many mass market publications targeted directly to the individual investor. Investors issue with investment advisors is not so much finding one (believe me, there are thousands of advisors trying to find you right now), but picking from amongst the many qualified professionals.

Most individual donors don’t even know the difference between a nonprofit and a foundation. Institutional philanthropy actual is making a effort to let people know what they do since most Americans cannot even name a single large foundation. Individual donors with a portfolio of appreciated assets still mostly write checks to charity instead of transfering assets or setting up a philanthropic account (this is similar to saving for retirement in a checking account because an investor had never heard of a 401k).

I could go on and on.

I actual have my own criticism of the sentence in my column that Edwards and Moniz call out. When I wrote “while yesterday’s donors were content to give to a non-profit based on
emotional appeal, today’s donors want to know their money is really
going to have an impact,” I actually overstated the case in the opposite direction of the way they saw it. Edwards and Moniz argued that the statement was false because they believe yesterday’s donors were focused on impact. I would say that my statement was flawed because in fact, not even “today’s donor” knows what impact is. “Tomorrow’s donor” will be the ones deeply concerned with impact. But at least today we have real movement in that direction.

By Sean Stannard-Stockton | Also posted in Cross-Disciplinary Conversations, Effective Giving, Foundations, Impact Measurement, Media, New Philanthropy, Philanthropy | Comments (12)

Short-term vs. Long-term Focus in Philanthropy

April 4, 2008 – 8:03 am

In the Summer 2007 edition of the Stanford Social Innovation Review, Charles Conn, a senior advisor to the Gordon and Betty Moore Foundation and a high tech executive, wrote about the short-term focus of most foundations in an article titled Robbing the Grandchildren:

If future generations could vote on how foundations invest their money today, would they choose the current allocation? Byron Swift, chair and executive director of the World Land Trust, suggested this thought experiment to me, and I am disturbed to find that my answer is no……U.S. charitable foundations are better positioned than companies, governments, and universities to address these long-term, potentially catastrophic problems. One of the few sources of long-term risk capital, they control more than $500 billion in assets, generating funding that with other charitable giving totals almost 2 percent of GDP. With Warren Buffett’s gift, the Gates Foundation alone will control more than $60 billion in assets and $3 billion to $5 billion in annual spending. Other foundations closely associated with the digital revolution (such as Dell, Ellison, Packard, Hewlett, Moore, Omidyar, Page and Brin, Yang) could account for at least $50 billion to $70 billion more.

Perversely, though, many of these new tech entrepreneurs are worsening foundations’ shortsightedness by implementing businesslike metrics and controls in a way that reinforces short-term thinking and behavior. Other questionable management practices, such as low payout rates and lack of coordination with other organizations, further aggravate foundations’ myopia…

…A recent movement, sometimes called philanthrocapitalism or venture philanthropy, seeks to avoid complacency and lack of focus in foundation management by introducing rigorous success metrics and accountability practices. Many of these new-style foundations limit their scope to a few problem areas and, like corporations, intensely monitor outcome metrics, often with tight windows for review. To those of us who came to foundation work after a career in business, this sounds eminently sensible; after all, the foundation world is littered with fragmented, unfocused, and failed programs…

This short-term, metric-focused approach likewise hampers grantees. Foundations take the passionate and committed people in these institutions and harness them to near-term indices of progress. Grantees, in turn, stop playing the long-term game in order to keep the money flowing. They aim lower, too.

I agree completely with Conn’s thesis, but I want to elaborate because Conn fuses “short-term”, “metric-focus” and “businesslike” as if they automatically go hand in hand.

In the stock market, most people have become more and more short-term oriented. In the 1950’s, investors held stocks for an average of 7 years. Today the average is 11 months. Investors have gained access to vast amounts of information they never use to see and yet in many cases have used this information to change their mind more frequently rather than to gain more conviction in their decisions.

Almost all great investors make financial decisions based on a long-term outlook, not a prediction of what will happen in the next three months. At my firm Ensemble Capital Management, we talk about “arbitraging other investors’ time horizons”. In other words, we try to identify situations where short-term bad news about a company causes other investors to sell the stock so that we can buy it at lower prices. We use short-term good news that causes a stock to move higher to sell stock in companies whose longer-term outlook we think is deteriorating. Warren Buffett or most any great investor will tell you that Wall Street’s obsession with quarterly earnings reports is misplaced. Some companies (such as Coca-Cola, a company Buffett has owned a long time) have stopped issuing guidance to investors regarding what their next quarterly earnings might be.

It is human nature to want results as quickly as possible. But to achieve success, we must match our investment decisions to our time horizon. If we want to fix a local school because our child will be attending starting next year, then it might make sense to focus on short-term solutions. But most donors fund issues because they want to have a sustained impact on a situation. The techniques that might reduce crime in a bad neighborhood the most over the next month are unlikely to be the techniques that will have the largest, permanent impact on reducing crime rates over the next couple of decades.

Financial market participants are often short-term focused. They often focus on metrics which describe short-term conditions, but do little to illuminate long-term trends. But great investors and great philanthropists must focus on the information that matters to the long-term success of their projects.

Disclosure: Nothing in this post should be considered investment advice.

By Sean Stannard-Stockton | Also posted in Effective Giving, Evaluation, Impact Measurement, Philanthropic Capital Markets | Comments (0)

Sustainable Nonprofit Operating Models

April 2, 2008 – 2:47 pm

In my recent Financial Times column on VolunteerMatch’s “growth capital offering”, I state that the organization’s prospectus says that the new capital will fund a plan to make VolunteerMatch self-sustaining and generating an operating surplus by 2012. Reader Jeremy Gregg, who writes the blog The Raiser’s Razor, leaves a comment asking about this claim:

I would be very interested to know how a non-profit can design a plan that meets these standards: we are so used to annual operations plans and short-term proposals that it is hard to envision such a concept. Are they tied to social enterprise and earned income strategies that can make the organization self-sustaining?

The VolunteerMatch prospectus does a good job laying out their self-sustaining operating model. Before I proceed, I should note that other than reading the prospectus and speaking with their president as well as some other related parties, I am not intimately familiar with VolunteerMatch. So please take my comments as my own personal opinion and realize that I am not speaking on behalf of VolunteerMatch in any way.

The VolunteerMatch proposal does not suggest that their model will earn a profit. There are three core areas where they will receive support, 1) payments from corporations that use their corporate volunteer program services, 2) payments from nonprofits who pay for premium access, and 3) reliable ongoing contributions from volunteers who use the network. This is not a “profitable” model, but it is a sustainable model. VolunteerMatch should be able to track what level of donations they can expect from the users of their service (the volunteers) and then count on that fundraising as they bring more users to the network.

A sustainable nonprofit operating model does not mean that the organization must charge for their services. I do not agree with the idea that nonprofits should seek to build models that earn income unless that model is the most effective way to further the nonprofit’s mission. Fundraising can and should be part of a sustainable operating model. Unfortunately, I too often hear of a nonprofit who will generate a loss (as is expected) and then “make up the difference with fundraising”. That is not sustainable. A sustainable fundraising plan should be built into the operating model. Note that VolunteerMatch does not just say that they will raise money; they relate their goals to their experience with their actual user base and then make projections based on certain growth plans.

Fundraising is something that organizations can invest in. The growth capital that VolunteerMatch is looking for is not sustainable funding. It is a onetime investment that will be used in part to build a sustainable stream of fees and donations.

A sustainable operating model that relies on fundraising (as most all nonprofits must, otherwise they should ask why they are not a for-profit), must be able to budget on certain fundraising goals. Not a fundraising budget that is whatever size fills the gap between expenses and revenue, but a budget that is based on reliable projections.

By Sean Stannard-Stockton | Also posted in Fundraising, New Philanthropy, Philanthropic Capital Markets, Philanthropy | Comments (5)

Investors vs Donors III

February 29, 2008 – 9:41 am

To recap, my questions from my earlier post were:

  1. Why do investors take credit for picking great investments (”look how smart I am, I bought XYZ stock!”), while philanthropists, especially foundations, claim that the credit goes to the nonprofits they fund (”the grantee did all the work”).

  2. Why is it acceptable for investors to talk about investments they think are bad (”Don’t buy ABC stock, their management is terrible!”), while philanthropists never badmouth nonprofits, even if they think they are ineffective?

  3. Related to #2: Why do public companies generally ignore all the talking heads who say negative things about them, while nonprofits find it intolerable to have a prominent person speak negatively about them in public?

The responses from readers can be found here.

The primary response to Question 2 was that funders/donors do say negative things about nonprofits behind closed doors and within private circles. But that they do not do the same publicly for fear of damaging their relationship with grantees. The point was made that funders (unlike investors in public companies), must maintain a healthy relationship with grantees to do their job well. Most readers seemed to appreciate the positive long term impact on the sector of public criticism and general truth telling, but worried that in the short term it would be a large negative.

I think this is an entirely solid argument. Philanthropy is currently much more like venture capital than investing in the stock market (it is no coincidence that venture philanthropy approaches have gained a lot of credence in recent years). Venture capitalists invest in private companies where funding comes primarily from a small set of large funders. They also have an active role and continuing relationship with the companies they fund. This is different from stock market investing where most investors are passive holders of stock and do not interact with the company at all.

Within the context of philanthropy as a private marketplace, I think the arguments for why public criticism does not work are valid.

I don’t think philanthropy is going to be a private marketplace for much longer.

Individuals already give seven times the amount that foundations give each year. Combining the Fidelity and Schwab donor advised funds (representing organized individual giving) gives you an annual grantmaker that rivals the Gates Foundation. Most high net worth individuals are only in the early stages of realizing that giving is something they can approach with a strategy that maximizes impact and tactics that make the most of what they have.

Public criticism of publicly traded companies is no big deal because the shareholder base is so broad. But a venture capitalist going on TV and knocking a private startup might cause it to go bankrupt as funding dried up.

Philanthropy is not yet a public market. The arguments presented against public criticism are all valid and correct today. We need to be preparing for tomorrow.

Venture Capitalists do talk about startups that they think are great. So do some foundations. Note the constant promotion of Nurse-Family Partnership by the venture philanthropy focused Edna McConnell Clark Foundation. You can read a great article about their approach here (note the reporter labels it as “controversial”). Maybe this positive commentary is a bridge to future criticism. Reader “young staffer” writes:

Foundations and donors actually don’t do enough to tout their successes and to make a strong, public case championing the relative effectiveness and strength of their best grantees. It’s not just that the grantees did all the work; it’s that we talk only about how our grantees do good things and yours do too. I think it would be way easier to get the ball rolling towards more criticism if it started from a place of making a case for the best social investments rather than highlighting the worst.

So why then don’t more “expert grantmakers” (mainly large foundations) publicly promote their knowledge? Reader Renata Rafferty writes:

Philanthropy in our society is frowned upon if it is considered self-serving. Therefore, to boast about one’s wise philanthropic investment “picks” would be, well, boastful and self-serving.

Look, if you have a billion dollar endowment and 30 employees working on a focused set of issues, it is not “boastful and self-serving” to talk about your “wise philanthropic investment picks”. If you are not making wise philanthropic investment picks there is something seriously wrong. I assume that large foundations are smart grantmakers. I’m not suggesting that they shout from the rooftops how great they are in an attempt to convince people. I just want there to be a public conversation about social investing the way we have a public conversation about the stock market.

Don’t forget that we’re talking about all of this within the context of a country where most people think nonprofits waste donations. It is hard to imagine that criticism could be all that damaging. You can’t fall very far once you’re already laying on the floor. Maybe Americans would have a better view of nonprofits if they heard experts talk negatively about some of them and positively about others. Realize that the underlying assumption that donors who want low “overhead expenses” from nonprofits is that the nonprofits are a value destroying entity that just gets in the way of the money going to the actual cause.

When a hedge fund manager goes on CNBC and talks about her favorite stocks, it is not “boastful and self-serving”. She is an acknowledged expert and the public appreciates (whether they agree or disagree with her picks) the opportunity to hear her thoughts.

By Sean Stannard-Stockton | Also posted in Cross-Disciplinary Conversations, Effective Giving, Media, New Philanthropy, Philanthropic Capital Markets, Philanthropy, Transparency | Comments (13)

Investors vs. Donors

February 27, 2008 – 8:30 am

I have some questions and would love your feedback.

  1. Why do investors take credit for picking great investments (”look how smart I am, I bought XYZ stock!”), while philanthropists, especially foundations, claim that the credit goes to the nonprofits they fund (”the grantee did all the work”).
  2. Why is it acceptable for investors to talk about investments they think are bad (”Don’t buy ABC stock, their management is terrible!”), while philanthropists never badmouth nonprofits, even if they think they are ineffective?
  3. Related to #2: Why do public companies generally ignore all the talking heads who say negative things about them, while nonprofits find it intolerable to have a prominent person speak negatively about them in public?

If you’ve read this blog for awhile, you probably think these are leading questions and that I have a firm bias about which approach is better. But I’m truly asking these questions with an open mind. Recently I met with the director of philanthropy-focused grantmaking at a large foundation. I brought up the idea that publicly talking negatively about ineffective nonprofits (especially those that the foundation thought were not “fixable”, say because management was incompetent) would produce a positive social impact by directing other donors’ funds away from the bad nonprofit and towards more effective competitors. She told me that it was a primary value of the foundation to not harm grantees.

I think that is a very compelling counter argument and I’m interested in how readers view my three questions above and the idea that not harming grantees means never saying anything negative about a nonprofit.

By Sean Stannard-Stockton | Also posted in Effective Giving, Evaluation, Foundations, Philanthropic Capital Markets, Philanthropy | Comments (9)

Do Nonprofits Trust People?

February 11, 2008 – 8:00 am

A new blog I’ve been following, LifeYears, asks an interesting question today:

Non-profits seem sceptical towards outcome-based indicators of how effective different initiatives and projects are. Is this because they are afraid of what “ordinary people” would think and do if they had this information? And if so, could such a worry be rational?

The author, Ole Rogeberg, poses the question very seriously without passing judgment:

Personally, I hope (and want to believe) that outcome-based indicators would make the connection between giving and accomplishing stronger, that people would not just give in order to “do a good deed” but also start giving to “have an impact on malnutrition” or “reduce malaria” etc. But other people might believe that the consequences would be different. But other people might believe that the consequences would be different. Two possible worries that immediately come to mind:
  • Myopic funding: The more concrete, short-term and certain a program was according to its outcome indicator, the more funding it might receive. This might make it easy to get funding for vaccines and malaria nets, but hard to get funding for investments and development in health infrastructure, education, human rights work with women, etc.
  • Over-focused funding: Some measures may catch the public’s interest far more than others (”go viral”), and this might lead to large shares of funds going to these areas - not because the need is the largest or the impact the greatest, but simply because the indicator is catchy in some way.

Ole ends:

Even if you personally don’t see the problem - how can we answer this fear and develop indicators that don’t have excessive (largely unintended) negative consequences?

Important questions. Change is difficult and often has unintended consequences. Many, many people are resistant to my calls for more measurement and analysis of nonprofit outcomes. How can we handle their concerns? Or might their concerns be right?

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By Sean Stannard-Stockton | Also posted in Evaluation, Impact Measurement, Philanthropy, Transparency | Comments (1)

Efficient Markets in Philanthropy

January 24, 2008 – 9:25 am

In response to my post yesterday in which I discussed the value of information to philanthropy and why donors should desire efficient philanthropic markets, Phil Cubeta writes:

The logic here can become relentless and destructive. What this tends towards a lists, like league tables in a sport, with the best at the top. It leads then to managing a nonprofit by the numbers, to get the rating, and it leads to shutting down those that don’t rank high. We then have the tyranny of the metrics, however much arbitrariness is built into them…

The world you want - are you sitting in corner office reading a spreadsheet?

So are the philanthropic capital markets I envision boring and lifeless with endless spreadsheets and numbers to crunch? Not in the least.

Economics is often called the “dismal science”. I know that many people think that finance is boring. But the vision of financial markets as nothing but numbers and spreadsheets does not capture the reality. Do investors buy stock in Apple because they spent hours and hours processing spreadsheet calculations? No. While at the end of the day, buyers of Apple stock believe that the return on capital being generated by the company will make for a profitable investment, the information they use to determine that are not just numbers. The way in which Apple has captured the imagination of the consumer, (an intangible piece of data that cannot be added to a spreadsheet) is by far the most valuable asset that Apple has and it is a major reason why investors have flocked to the stock.

Have you ever watched CNBC, the news channel of the financial markets? It is far from some kind of spreadsheet crunching lecture. Every day, investors or all types come on the show and make passionate arguments for why certain companies are good investments. While numbers and calculations underlie much of their thinking, it is the story, the human story of the companies they discuss that take center stage.

Warren Buffet is widely considered the best for-profit investor of his generation. Does he sit in a corner office reading a spreadsheet the way that Phil suggests? The quote below is from noted investor Whitney Tilson (Tilson is a huge fan of Buffet and a fellow columnist of mine at the Financial Times):

If the future were predictable with any degree of precision, then valuation would be easy. But the future is inherently unpredictable, so valuation is hard — and it’s ambiguous. Good thinking about valuation is less about plugging numbers into a spreadsheet than weighing many competing factors and determining probabilities. It’s neither art nor science — it’s roughly equal amounts of both.

The lack of precision around valuation makes a lot of people uncomfortable. To deal with this discomfort, some people wrap themselves in the security blanket of complex discounted cash flow analyses. My view of these things is best summarized by this brief exchange at the 1996 Berkshire Hathaway annual meeting:

Charlie Munger (Berkshire Hathaway’s vice chairman) said, “Warren talks about these discounted cash flows. I’ve never seen him do one.”

“It’s true,” replied Buffett. “If (the value of a company) doesn’t just scream out at you, it’s too close.”

Taking liberties with Tilson’s quote, I would argue that donors should not “wrap themselves in the security blanket of metrics” because “the lack of precision around measuring the impact that nonprofits achieve makes them uncomfortable.”

World-class investors do not sit in their office crunching spreadsheets all day. Neither should world-class donors. But the underlying logic of both should be that of achieving the highest return on investment.

Recently Phil commented to Perla Ni regarding her site Great Nonprofits (which offers reviews of nonprofits written by volunteers, donors and the people served by the nonprofit):

Thank you so much, Perla, for setting the record straight. In fact, your site is the exact opposite of a metrics driven exercise. You are bringing together the voices of those who have been touched by a nonprofit. I finally “got” what you are doing.

An efficient philanthropic capital market does not only view numbers as valuable inputs to the decision making process. Sites like Great Nonprofits offer extremely valuable information to donors. This sort of qualitative information is critical to both donors and for-profit investors. Great Nonprofits is not the opposite of a metrics driven exercise. They are both part of the same process of determining where donors and investors should direct their capital.

Disclaimer: Nothing in this blog should be construed as investment, tax or legal advice. This blog is for informational use only.

By Sean Stannard-Stockton | Also posted in Effective Giving, Evaluation, Impact Measurement, New Philanthropy, Philanthropic Capital Markets, Philanthropy, Transparency | Comments (7)

Information Sharing in Philanthropy

January 23, 2008 – 11:45 am

I wrote a post a while ago called Paul Brest Needs a Blog (Paul is the head of the Hewlett Foundation). I’ve been an advocate for more people in philanthropy to start blogging in general. In the above mentioned post I wrote:

So why should foundations blog? It seems to me that the imperative is not for them to embrace technology so much as it is for foundations to join and begin to drive the online philanthropy conversation. [But] it is the two-way flow of information that blogs encourage that is important, not blogs themselves.

Even so I’ve noted recently that some people feel that I’ve pushed blogging rather than information sharing. As the conversation we’re all having unfolds I think it is important to take a step back and make sure we haven’t missed the forest for the trees. I wish I had expressed my thoughts with more clarity.
When Phil Cubeta recently asked why nonprofits should blog, astute reader Michele Moon asked:

I’m not entirely sure why it’s blogging, in particular, that’s the focus of discussion, especially because it’s now considered a little bit old-hat, Web 1.5. What is it about the format that makes it so essential to transparency and its tyrant? Is it actually blogging you want to see - personal, real-time updates and editorials, followed (if you’re lucky) by people who read, comment, and sometimes stick around to converse?… Why should it be blogging that we aim to do, or is that shorthand for more complicated online interactivity?

I’m guilty of using “blogging” as short hand for information sharing. I’ll stop making that mistake.

When economists speak about efficient markets they are talking about a situation where money flows to the organizations that can put it to the best use. Widely available, robust information is a critical factor for a functioning efficient market. Recently, in a conversation with Phil Buchanan and other readers on this issue I wrote the following (you can find the full thread here. The Chronicle of Philanthropy recently highlighted the conversation):

In an efficient market, investing is a zero sum game. Maximum returns are generated globally so the only question is matching an investor’s risk/return preferences. In inefficient markets, higher returns accrue to more “effective/smarter” investors. In a public benefit market, since all returns accrue to everyone, investors should desire an efficient market within which they could align their social investments with their personal values/goals.

The philanthropic capital markets are highly inefficient. Far more inefficient than any for-profit marketplace.

Therefore, it seems to me that making the philanthropic capital markets more efficient should be the number one priority of large funders who desire to be effective…

I’m not arguing that the public will make better decisions than the “experts”. I’m saying that efficient markets will produce better outcomes than inefficient markets. In the for-profit world, inefficient markets are great for “expert” investors because they can exploit superior information to generate outperformance of investment returns. But these inefficient markets reduce the total returns in the market by preventing capital from flowing to the best performing investments.

What I’m saying is that unlike in the for-profit market, “expert” philanthropist enjoy no advantage from superior information. The returns they generate accrue to the public, and so no “outperformance” is possible. Instead, they should be interested in the total market functioning at a higher level, since that is the only way to increase the social return on investment that accrues to everyone.

This is the challenge we face as a field. How can we ensure that the $300 billion that is given to charity each year is flowing to the organizations that can put the money to its best use? The key will be our ability to supply market participants with widely available, robust information. Blogs are one tool in this work. There are many others.

By Sean Stannard-Stockton | Also posted in Cross-Disciplinary Conversations, Effective Giving, Evaluation, Foundations, Giving Blogs, Impact Measurement, New Philanthropy, Open Source Philanthropy, Philanthropic Capital Markets, Philanthropic Technology, Philanthropy, Transparency | Comments (18)